Colombia - Third National Roads Sector Project

The World Bank tOR OFFICIAL USE ONLY MICROFICHE COPY Repot N P-5600-CO Report No. P- 5600-CO Type: (PM) MATES, AMN/ X38648 / I-5132/ LA3IE MEMORANDUM AND RECOMMNDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO US$266.0 MILLIoN TO THE FONDO VIAL NACIONAL WITH THE GUARATEE OF THE REPUBLIC OF COLOMBIA FOR THE THIRD NATIONAL ROADS SECTOR POJECT MARCH 3, 1992 TbW docUDeN has a resticted distkibUtioD and may be ulsed by repents only In te perfonvance of .. thelr feidal -dudmiests couteos may nlot otherwise be disclosed witbout World Bunls ugforinatimt  CURRENCY EQUIVALENTS Currency Unit Colombia Peso $Col = UScent 0.16 US$1.00 = $Col 630 WEIGHTS AND MEASURES 1 gallon - 3.785 liters 1 mile = 1.613 km ABBREVIATIONS FVN National Highway Fund INDERENA National Environmental Agency MOPT Ministry of Public Works and Transport FISCAL YEAR January 1 - December 31  FOR OMCIAL USE ONLY COLOMBIA THIRD NATIONAL ROADS SECTOR PROJECT Loan and ProieCt SGu ary Borrower: National Highway Fund (FVN) Guarantor Republic of Colombia j4weficiarv2 Ministry of Public Works and Transport (MOPT). Lo"iS Amount s US$266.0 million equivalent. 17 years, including five years of grace, at the Bank's standard variable interest rate. X&Mn.nCint Plan: Government US$148.0 million IBRD USS266.0 million Total US$414.0 million Economic Rate of Return: 31Z - weighted average for all roads. Staff Lu=ort No:s 9781-CO IBRD 23034R This document has a testted distribudon and may t' e .! recipients only in the pfoance of their oficial dutis. Its contents may not otherwise be discLx;ed without World Dank authorization.  MEORANDUM AND RECOMiMNDATION OF TE1 PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXCUTIVE DIRECTORS ON A PROPOSED LOAN TO THE PONDO VIAL NACIONAL WITH THE GUAANTEE OF THE REPJBLIC OF COLO!.IA FOR TIlHMRD RATIONAL ROADS IECT PROJECT I' The following memorandum and recommendation on a proposed loan of US$266.0 million equivalent to the Pondo Vial Nacional (National Highway Fund), with the guarantee of the Republic of Colombia, is submitted for your approval. The proposed loan would be repayable over 17 years, including five years of grace, at the Bank's standard variable interest rate. It would help finance the Third National Roads Sector Project. 2. Sector Background. Colombia, with an area of about 1.1 million square kilometers, and a population of 33 million, enjoys access to both the Pacific Ocean and the Caribbean Sea. This advantage, however, is offset by the difficulty of movements between the coastal zone and the interior. The three massive ranges ef the Andean mountains, running two thirde the length of the country, present a serious obstacle to communications. In addition, average hauls are large; the distance from the capital Bogot& to the Atlantic ports is about 1,000 km. Consequently, land transport costs are high. The recent report on the role of Transport in International Trade (8900-CO, November 1990) has shown that transport costs constitute 301 of the Import price of wheat and as -high as 70S of the export price of coal. 3. Colombia has now developed an extensive road network consisting of 112,000 km, of which the national network accounts for about 26,300 km. The latter includes about 10,800 km (412) of paved roads and 15,500 km of unpaved roads. Of the total national network, about 61 of the paved roads and 22Z of the unpaved roads are classified as in bad condition. The proposed project includes rehabilitation of a large part of these roads. Colombia has about 1,400 km of navigable waterways of which the most important is the Magdalena River. General cargo on this river has been declining steadily, reflecting in part the restriction of navigation to the wet season; this issue will be addressed by the proposed project. 4. The Ministry of Public Works and Transport (MOPT) is directly responsible for the planning, construction and maintenance of the country's national highway network (26,300 km). An autonomous national agency, the National Fund for Rural Roads, is responsible for rural road construction, improvement and maintenance over a network of 46,500 km. In addition, secondary (departmental) roads (39,200 km) are under the jurisdiction of the autonomous regional entities ("departments"). The Government is considering the transfer of a major part of the national road network to the Departments. Given the high variation in the Departments' capacity to manage and maintain the roads already under their jurisdiction, any transfer of additional roads, labor, equipment and financial resources requires careful study and planning; otherwise, the risk is high that the quality of the network as a whole will deteriorate rapidly. This issue is being addressed by the Project through a detailed study to be followed by an agreement between the Bank and MOPT on the modalities of the decentralization process.  -2- 5. The quality of MOPT engineers is adequate. However, lack of up-to- date standards and guidelines have resulted in highly variable quality of pro3ect preparation and consequent need to change project design during execution, tine delays and cost overruns. Furthermore, MOPT has often over- programed its reawurces, which led to lack of counterpart funds and consequent delays in completion of works. The proposed project includes various mectan1sms to improve project programming and quality of engineering studies. 6. Maintenance of the national road system is the responsibility of the MOPT. Allocation for road maintenance has generally been in line with requirements. About 301 of all maintenance service is contracted out to private contractors (compared to 13S in 1987), reflecting the Government's emphasis on contracting out services to the extent possible. This share will grow to over 331 under the proposed project. In addition, over 151 of maintenance work will be contracted to small cooperatives (micro-enterprises) of 10-15 workers, who have proved very effective in the past. While the overall allocation for road maintenance has been reasonable, there is lack of detailed planning of such maintenance activities. Efforts were made in prior loans to systematize maintenance planning including preparation of a pavement and equipment management system in three pilot districts. The design of these systems has been completed, but has not been implemented at the field level because of lack of management com-tment. During preparation of the proposed project, a Five Year (1991-95) Maintenance Plan was prepared by MOPT staff under Bank guidance and with full support of MOPT's management. The proposed project includes technical assistance to update the existing data base, train DOPT otaff, and implement the new system in the field. 7. Transport regulations are in general satisfactory. The trucking sector is efficient, entry into the sector is not restricted, and the Goverment does not interfere in setting tariff rates. The decree setting out limits on axle loads is satisfactory and its enforcement is being strengthened under an on-going project. Imports of vehicles, which have been restricted for many years, were fully liberalized in 1991. 8. Gasoline and diesel prices, which were priced in mid-1991 at US$0.59 per gallon, were raised in January 1992 by 261, bringing them to a level of US$0.72 per gallon, above the border price level of US$0.67. The Government bas further committed itself to maintain the average price level of gasoline and diesel at least equal to the border price level plus distribution costs. However, even after the recent price increase, road user charges (taxes on fuel, road tolls, registration fees, differential duties, etc.) would cover only 621 of all economic costs of carrying the existing public road network (i.e. maintenance, rehabilitation and improvements). This is caused by the fact that, while the total fuel tax per gallon is about US$0.19, only the differance between the retail price and the international price level (US$0.05) can be considered an economic tax. It is estimated that a tax of US$0.12 above the international price level is needed to bring road user costs and charges into balance in the absence of any real increase in other charp"s. Agreement was reached during negotiations that road user charges will be raised in stages as to cover 1001 of road costs by 1994.  -3- 9* Ratlonale for Bank Involvegent. The project is an integral part of Bank support for the Government's strategy to open the economy to international competition and to make more efficient use of economic assets. This objective is being pursued at the level of macroeconomic and sectoral policy through a coherent eet of reforms of the trade regime, financial, industrial, transport and power sectors. The Bank is supporting this strategy of "aiertura" through a series of operations including the recently approved Public Sector Reform Loan, Industrial Restructuring Project, and others under preparation. The proposed project will further this strategy by providing part of the infrastructure needed to support the export drive and by reducing transport costs through bettfsr maintenance and rehabilitation. At the same time, it aims to correct the institutional weaknesses observed under the past Bank loans in investment proparation, programming and budgetary control. 10. Under the ongoing Secend National Highways Sector Project (Loan 2829-CO), a major effort was put into paving sections of a north-south highway corridor linking BogotA and other major population centers with the Atlantic ports of Santa Marta and Cartagena. The proposed project will finance the completion of this corridor, which will replace the existing mountain route and reduce transport costs by about 301. As a second priority, works will continue on a second north-south corridor connecting Medellin and Popayan, two important centers, with the Atlantic ports, and on providing improved linkages between other production and population centers with these two north-south corridors. 11. The experience under the Second National Highways Sector Project has been mixed. While major progress has been achieved in terms of physical execution and improving management information, some institutional objectives have not been fully achieved. First, while the design of the road maintenance system has been completed, it has not been implemented in the field. Second, programming of project implementation was deficient and resulted in overcoamitment of resources and consequent delays and costs overruns. Third, the quality of project engineering was inconsistent, requiring changes in design during project execution. The proposed project addresses these issues by introducing a rolling five-year investment plan and a five-year revenue and expenditure plan which will be updated twice a year under Bank supervision. It will assure adequacy of financial resources for the implementation of the approved subprojects. Also, a manual for engineering design and agreed standards for pavement structures and road geometric design will improve the quality of engineering preparation work. 12. The project will assist in the decentralization of the national road system from the planning stage through implementation and the restructuring of NOPT based on studies to be financed by the project and by the Public Sector Reform Loan., The Bank's involvement will ensure efficient pricing of petroleum products and adequacy of user charges. Finally, the Dank's financing will result, for the first time, in a direct supervisory role for the central Government over the execution of a project by MOPT. 13. Proiect Ob1ectives. The objectives of the proposed project are to: (a) reduce the transport cost of freight, especially long-distance import and  -4- export traffic; (b) improve the quality of project preparation by MOPT and its consultantss (c) improve road maintenance planning and practices; (d) improve project planning and execution and reduce construction costs; (e) assist MOPT in the process of decentralization of the national road system and in its own restructurings and (f) improve the environmental management of MOPT. 14. Proiect DesctIgtion. The project finances a share of the Five-esar 1991-95 Highway Investment Plan including: (i) completion of about 2,000 Im of roads started either under the prior Bank loan or with MOPT's own resources; (ii) construction and rehabilitation of twelve high-priority new road projects totalling about 400 kkm; (iii) a bridge rehabilitation program; (iv) a program of river training and dredging and river port improvement; (v) purchases and rehabilitation of road maintenance equipment; (vi) road safety works; and (vii) technical assistance, studies and training in the areas of management and operations, road engineering, road maintenance, management information and environmental control. 15. Imnlementatign Arran_ements. The proposed loan would be made to the National Highway Fund (FyI). PVN is an autonomous legal entity, which is able to contract financial obligations and finances the construction, maintenance and supervision tasks carried out by MOPT. Preparation and execution of specific project components will be carried out by MOPT's various directorates as follows: Highways Directorate for the roads and bridges civil works, the planning and execution of the road maintenance 7rogram and the supervision of technical studies and assistance; Directorate of Navigation and Ports for the river dredging and river port improvement component; Subdirectorate of Equipment for purchase and rehabilitation of equipment; Office of Planning for supervision of economic studies and related technical assistance; and Directorate of Industrial Relations for the training program. Overall project coordiuation and follow-up will be done by a newly formed Project Implementation Unit in MOPT. Environmental control will be provided by a new Environmental Unit within MOPT. All civil works and their supervision will be carried out by contract. The procurement methods and the proposed allocation of loan proceeds are attached in Schedule B. Government's 352 contribution to the program will serve as counterpart funds; it will be fully documented and monitored as an integral part of the project. Retroactive financing, up to a total of US$18.7 million, is recommended for payments made after September 1, 1991 but before the date of loan signature, for ongoing road civil works and for consultants. A Special Account will be established in Banco de la Rep6blica with an initial deposit of US$15 million. MOFT will contract private external auditors to audit project expenditure, the Special Account and Statements of Expenditures. 16. Environmental Impact. All road projects that are proposed by the MONP are subject to an environmental review by MOPT and the national environmental agency-INDEUNA. However, MOP? staff has not been assigned full time to this task and the environmental analysis has been done on an ad hoc basis. During project preparation, agreement was reached on detailed terms of reference for an environmental unit and its staffing plan. Purthermore, a training program was designed for upgrading the quality of MOPT staff in environmental management. In terms of specific project environmental issues,  only the river training and dredging work will require a full Impact assessment study because of its potential impact on fisheries. Among the road and bridge sub-projects (ongoing and now) only three roads and one bridge require a more limited environmental analysis. These, as well as any new project, will be subject to an environmental review and approved by INDERENA, as required by Colombian law. No new sub-project w$.11 be approved by the Bank without a satisfactory onvironmental evaluation. 17. Aareed Actions. The main actions agreed with MOPT and the Government during negotiations are: (i) a Performance Plan to be signed between the Ministry of Finance, the National Planning Department and MOPT, whereby the first two, with the help of consultants, will supervise and monitor the project based on an agreed set of quantitative indicators; (ii) carrying out a study and zonsultations on the implementation of the national road network decentralization; (iii) a five-year highway investment rlan snd PNWl revenues and expenditures program and twice-yearly updating of these plns;l (iv) a five-year road maintenance plan and its annual updating and reorganization of the maintenance functions of MOPT; (v) approval by the Bank of new sub-projects only if: (a) they satisfy economic and environmental criteria; (b) PVN has sufficient funds to carry out the sub-projects according to schedule; and (c) the Bank is satisfied with the overall execution of the project; (vi) putting into effect new prequalification guidelines for civil works' contractors; (vii) implementing a comprehensive river maintenance program; (viii) maintaining the average retail price of gasoline and diesel products at least equal to the average border price level plus distribution costs of such productst and (ix) assuring that road user charges cover the cost of maintaining and improving the total road network by 1994 and thereafter (with interim targets for 1992 and 1993). The conditions for loan effectiveness ares (a) establishing a new Envirounental Unit within MOPT; and (b) creating a Project Implementation Unit within MOPT to monitor and 4dminister the project. The conditions for disbursement of the river works are: (a) submission of an acceptable river maintenance program; and (b) carrying out an environmental impact study of the river works and agree on necessary mitigatory actions. The legal documents also provide for detailed annual reviews in key project areas. In particular, the annual reviews will cover the topics of road network decentralization, organizational restructuring of MOPT, project physical progress, institutional strengthening, environmental mitigatory actions, progress on road user charges, and the road investment and maintenance programs and their corresponding financing plans. The project also inclirdes a detailed action plan on technical and institutional aspects. 18. ProlectS Senefits. The project will result in substantial upgrading of about 10 of the total national road network and a significant reduction in vehicle operating costs and improved access to markets. The river component will improve navigation and allow year-around movement of export goods (mainly coal and petroleum) and bulk imports along the Nagdalena River. The project will improve the pricing efZiciency of gasoline and diesel and ensure that road users pay the cost of maintaining and improving the road network. The project will provide guidance to the road decentralization program, which has been approved in principle by the Government. Other project benefits include higher availability of road equipment, reduction in road maintenance cost,  -6- upgrading the quality of engineering designs, and improving sector planning snd budgetary control. 19. irogect &iPk_. There are three technical issues which present project risks (a) failure to Improve the quality of engineering work could cause design changes and cost overruns; (b) over-programming and deficient supervision could lead to delays in project execution; and (c) the elimination in July 1991 of earmarking of fuel taxes raises concerns regarding timely availability of c-anterpart funding. The proposed project aims at minimizing these risks by improving project preparation through the introduction of up- to-date standards fov project design, guidelines for preparation of engineering studies, a project supervision manual, and a rolling ftie-year investment plan, which will be updated twice a year. No new subproject will be approved unless it can be accommodated within the anticipated budget allocation. The Performance Plan contract to be signed by MOPT and the Government will install a tight supervision mechanism and increase the probability of the project performing as s^heduled. As part of such plan, the Government has agreed on simplified procedures for budg.tary transfers. Also, detailed budget contributions have been agreed with the Government for maintenance work required for the whole network. The fragile security situation in the country presents another risk, because it could result in interruption of works and inability to supervise and monitor works in the field. Recent political changes are expected to reduce this risk. 20. Recommendation. I am satisfied that the proposed loan would comply with the articles of agreement of the Bank and recommend that the Executive Directors approve the proposed loan. Lewis T. Preston President Attachments Washingon D.C. March 3, 1992  8chedule Ai T=URD NATIONAL RDE S2CT PR CT 5Ested Coots. and Financing PlA Estimated Coat: Eocal Porsien Total --------US$ million)-------- Road Rehabilitation 88.8 133.2 222.0 Bridges 3.9 5.8 9.7 River Training 10.6 16.0 26.6 Undefined Works 17.1 25.6 42.7 Equipment 0.0 30.5 30.5 Road Safety 0.0 6.0 6.0 TAS end training 0.4 4.5 4.9 Physical Contingencies 12.0 18.1 30.1 Price Contingencies 15.2 26.3 41.5 Total Project Cost 14'8.0 2